Frank Russell Investment Company, et al.; Notice of Application, 25616-25620 [E6-6481]
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25616
Federal Register / Vol. 71, No. 83 / Monday, May 1, 2006 / Notices
(3) Page 67463: In section X,
‘‘Authorities and Waiver of Laws and
Regulations Required,’’ add the
following new waivers:
—Before the waiver for ‘‘Section
7512(3),’’ insert ‘‘Section 5753 and
5754 Recruitment, Relocation and
Retention Incentives. This waiver
applies only to the extent necessary to
allow employees and positions under
the demonstration project to be
treated as employees and positions
under the General Schedule or the SL/
ST pay plan.’’
—Before the waiver for ‘‘Section
752.401(a)(3),’’ insert ‘‘Part 575,
Subparts A, B and C, Recruitment,
Relocation and Retention Incentives.
This waiver applies only to the extent
necessary to allow employees and
positions under the demonstration
project to be treated as employees and
positions under the General Schedule
or the SL/ST pay plan.’’
III. Changes to the Project Plan
cchase on PROD1PC60 with NOTICES
address challenges such as labor market
competition and skill gap issues.
However, because of the previous
waivers, the demonstration project is
precluded from taking advantage of
these tools to address recruitment and
retention concerns. This notice removes
the demonstration project’s independent
authority to pay recruitment and
retention payments, thereby allowing
the project to use the recruitment and
retention incentive authorities in 5
U.S.C. 5753 and 5754, and subparts A
and C of 5 CFR part 575. This will
provide managers in the demonstration
project the same flexibilities now
available to General Schedule and other
employees under title 5. The
demonstration project needs to be able
to take advantage of legislative changes
to title 5 when appropriate. It should be
noted that since the demonstration
project did not waive 5 U.S.C. 5753 or
subpart B of 5 CFR part 575 pertaining
to relocation bonuses, the
demonstration project could use the
relocation incentive flexibilities
provided by the Federal Workforce
Flexibility Act of 2004 and
implementing regulations prior to this
notice. This notice continues to allow
the demonstration project to use the title
5 relocation incentive authority.
Frank Russell Investment Company, et
al.; Notice of Application
This notice modifies the Commerce
demonstration plan by rescinding its
independent authority related to
recruitment and retention payments,
thereby providing authority to use
recruitment and retention incentive
authorities under 5 U.S.C. 5753 and
5754, and subparts A and C of 5 CFR
part 575. The following discussion
refers readers to the substantive changes
to the project plan. The following page
numbers refer to the pages in the final
plan, published in the Federal Register
on December 24, 1997.
(1) Page 67451: Remove Paragraph
B.12, ‘‘Recruitment and Retention
Payments,’’ and renumber Paragraphs
B.13, ‘‘Travel Expenses,’’ and B.14,
‘‘Promotion,’’ as Paragraphs B.12 and
B.13, respectively.
(2) Page 67463: In section X,
‘‘Authorities and Waiver of Laws and
Regulations Required,’’ remove the
following waivers:
—‘‘5 U.S.C. 5753–5754 Recruitment and
relocation bonuses; Retention
allowances (except that relocation
bonuses under Section 5753 continue
to apply),’’
—‘‘Part 575, Subpart A, Recruitment
bonuses,’’ and
—‘‘Part 575, Subpart C, Retention
allowances.’’
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[FR Doc. 06–4049 Filed 4–28–06; 8:45 am]
BILLING CODE 6325–43–P
SECURITIES AND EXCHANGE
COMMISSION
[Investment Company Act Release No.
27292; 812–13214]
April 25, 2006.
Securities and Exchange
Commission (‘‘Commission’’).
ACTION: Notice of an application for an
order under (a) section 6(c) of the
Investment Company Act of 1940
(‘‘Act’’) granting an exemption from
sections 18(f) and 21(b) of the Act; (b)
section 12(d)(1)(J) of the Act granting an
exemption from section 12(d)(1) of the
Act; (c) sections 6(c) and 17(b) of the
Act granting an exemption from sections
17(a)(1) and 17(a)(3) of the Act; and (d)
section 17(d) of the Act and rule 17d–
1 under the Act to permit certain joint
transactions.
AGENCY:
SUMMARY OF THE APPLICATION:
Applicants request an order that would
permit certain registered open-end
management investment companies to
participate in a joint lending and
borrowing facility.
APPLICANTS: Frank Russell Investment
Company and Russell Investment Funds
(each, a ‘‘Trust’’ and collectively, the
‘‘Trusts’’), and Frank Russell Investment
Management Company (‘‘FRIMCo’’).
FILING DATES: The application was filed
on July 19, 2005 and amended on April
13, 2006. Applicants have agreed to file
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an amendment during the notice period,
the substance of which is reflected in
the notice.
HEARING OR NOTIFICATION OF HEARING: An
order granting the application will be
issued unless the Commission orders a
hearing. Interested persons may request
a hearing by writing to the
Commission’s Secretary and serving
applicants with a copy of the request,
personally or by mail. Hearing requests
should be received by the Commission
by 5:30 p.m. on May 22, 2006, and
should be accompanied by proof of
service on applicants, in the form of an
affidavit or, for lawyers, a certificate of
service. Hearing requests should state
the nature of the writer’s interest, the
reason for the request, and the issues
contested. Persons who wish to be
notified of a hearing may request
notification by writing to the
Commission’s Secretary.
ADDRESSES: Secretary, U.S. Securities
and Exchange Commission, 100 F
Street, NE., Washington, DC, 20549–
1090. Applicants, c/o Gregory J. Lyons,
Esq., Frank Russell Company, 909 A
Street, Tacoma, Washington 98402.
FOR FURTHER INFORMATION CONTACT:
Marilyn Mann, Senior Counsel, at (202)
551–6813 or Mary Kay Frech, Branch
Chief, at (202) 551–6821 (Division of
Investment Management, Office of
Investment Company Regulation).
SUPPLEMENTARY INFORMATION: The
following is a summary of the
application. The complete application
may be obtained for a fee at the
Commission’s Public Reference Desk,
100 F Street, NE., Washington, DC,
20549–0102 (tel. (202) 551–5850).
Applicants’ Representations
1. Each Trust is organized as a
Massachusetts business trust and is
registered under the Act as an open-end
management investment company.
Frank Russell Investment Company
consists of 34 separate series (‘‘Funds’’)
and Russell Investment Funds consists
of 5 separate Funds. FRIMCo, a
Washington corporation, is registered as
an investment adviser under the
Investment Advisers Act of 1940, and
serves as the investment adviser to each
Fund.1 An existing Commission order
permits the Funds to invest uninvested
cash balances in money market Funds
that comply with rule 2a–7 under the
Act.2
2. Some Funds may lend money to
banks or other entities by entering into
1 All entities that currently intend to rely on the
requested relief have been named as applicants.
2 Frank Russell Investment Company, Investment
Company Act Release Nos. 25416 (February 12,
2002) (notice) and 25458 (March 12, 2002) (order).
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repurchase agreements or purchasing
other short-term investments. Other
Funds may borrow money from the
same or similar banks for temporary
purposes to satisfy redemption requests
or to cover unanticipated cash shortfalls
such as a trade ‘‘fail’’ in which cash
payment for a security sold by a Fund
has been delayed. Currently, the Funds
have entered into a credit agreement
with a bank. If a Fund were to borrow
money under the credit agreement, it
would pay interest on the loan at a rate
that is significantly higher than the rate
that is earned by other (non-borrowing)
Funds on investments in repurchase
agreements and other short-term
instruments of the same maturity as the
loan under the credit agreement.
Applicants state that this differential
represents the profit the bank would
earn on loans under the credit
agreement and is not attributable to any
material difference in the credit quality
or risk of such transactions.
3. Applicants request an order that
would permit the Funds to enter into
interfund lending agreements
(‘‘Interfund Lending Agreements’’)
under which the Funds would lend and
borrow money for temporary purposes
directly to and from each other through
a credit facility (‘‘Interfund Loan’’).
Applicants believe that the proposed
credit facility would reduce the Funds’
borrowing costs and enhance their
ability to earn higher interest rates on
short-term investments. Although the
proposed credit facility would reduce
the Funds’ need to borrow from banks,
the Funds would be free to establish
committed lines of credit or other
borrowing arrangements with banks.
4. Applicants anticipate that the
credit facility would provide a
borrowing Fund with significant savings
when the cash position of the Fund is
insufficient to meet temporary cash
requirements. This situation could arise
when redemptions exceed anticipated
volumes and certain Funds have
insufficient cash on hand to satisfy such
redemptions. When a Fund liquidates
portfolio securities to meet redemption
requests which normally are effected
immediately, it often does not receive
payment in settlement for up to three
days (or longer for certain foreign
transactions). The credit facility would
provide a source of immediate, shortterm liquidity pending settlement of the
sale of portfolio securities.
5. Applicants also propose using the
credit facility when a sale of securities
‘‘fails’’ due to circumstances such as a
delay in the delivery of cash to a Fund’s
custodian or improper delivery
instructions by the broker effecting the
transaction. Sales fails may present a
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cash shortfall if a Fund has undertaken
to purchase securities using the
proceeds from the securities sold.
Alternatively, the Fund could fail on its
intended purchase due to lack of funds
from the previous sale, resulting in
additional cost to the Fund, or sell a
security on a same day settlement basis,
earning a lower return on the
investment. Use of the credit facility
under these circumstances would
enable the Fund to have access to
immediate short-term liquidity.
6. While bank borrowings generally
could supply needed cash to cover
unanticipated redemptions and sales
fails, under the proposed credit facility
a borrowing Fund would pay lower
interest rates than those offered by
banks on short-term loans. In addition,
Funds making short-term cash loans
directly to other Funds would earn
interest at a rate higher than they
otherwise could obtain from investing
their cash in repurchase agreements or
purchasing shares of a money market
Fund. Thus, applicants believe that the
proposed credit facility would benefit
both borrowing and lending Funds.
7. The interest rate charged to a Fund
on any Interfund Loan (‘‘Interfund Loan
Rate’’) would be the average of the
‘‘Repo Rate’’ and the ‘‘Bank Loan Rate,’’
both as defined below. The Repo Rate
on any day would be the highest rate
available to the Funds from investing in
overnight repurchase agreements. The
Bank Loan Rate on any day would be
calculated by FRIMCo each day an
Interfund Loan is made according to a
formula established by a Fund’s board
of trustees (‘‘Board’’) intended to
approximate the lowest interest rate at
which bank short-term loans would be
available to the Funds. The formula
would be based upon a publicly
available rate (e.g., Federal funds plus
25 basis points) and would vary with
this rate so as to reflect changing bank
loan rates. The Board of each Fund
would periodically review the
continuing appropriateness of using the
publicly available rate to determine the
Bank Loan Rate, as well as the
relationship between the Bank Loan
Rate and current bank loan rates that
would be available to the Funds. The
initial formula and any subsequent
modifications to the formula would be
subject to the approval of each Fund’s
Board.
8. The credit facility would be
administered by FRIMCo’s fund
accounting department, an investment
professional within FRIMCo who serves
as a portfolio manager of money market
Funds and a compliance professional
within FRIMCo (collectively, the
‘‘Credit Facility Team’’). Under the
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proposed credit facility, the portfolio
managers for each participating Fund
could provide standing instructions to
participate daily as a borrower or
lender. The Credit Facility Team on
each business day would collect data on
the uninvested cash and borrowing
requirements of all participating Funds
from the Funds’ custodian. Once it
determined the aggregate amount of
cash available for loans and borrowing
demand, the Credit Facility Team would
allocate loans among borrowing Funds
without any further communication
from portfolio managers other than the
money market Fund portfolio manager
on the Credit Facility Team. Applicants
expect far more available uninvested
cash each day than borrowing demand.
All allocations will require the approval
of at least one member of the Credit
Facility Team who is not a money
market Fund portfolio manager. After
the Credit Facility Team has allocated
cash for Interfund Loans, the Credit
Facility Team would invest any
remaining cash in accordance with the
standing instructions of portfolio
managers or return remaining amounts
to the Funds. The money market Funds
typically would not participate as
borrowers because they rarely need to
borrow cash to meet redemptions.
9. The Credit Facility Team would
allocate borrowing demand and cash
available for lending among the Funds
on what the Credit Facility Team
believes to be an equitable basis, subject
to certain administrative procedures
applicable to all Funds, such as the time
of filing requests to participate,
minimum loan lot sizes, and the need to
minimize the number of transactions
and associated administrative costs. To
reduce transaction costs, each Interfund
Loan normally would be allocated in a
manner intended to minimize the
number of participants necessary to
complete the loan transaction. The
method of allocation and related
administrative procedures would be
approved by each Fund’s Board,
including a majority of trustees who are
not ‘‘interested persons’’ of the Fund, as
defined in section 2(a)(19) of the Act
(‘‘Independent Trustees’’), to ensure that
both borrowing and lending Funds
participate on an equitable basis.
10. FRIMCo would (a) monitor the
Interfund Loan Rate and the other terms
and conditions of the loans; (b) limit the
borrowings and loans entered into by
each Fund to ensure that they comply
with the Fund’s investment policies and
limitations; (c) ensure equitable
treatment of each Fund; and (d) make
quarterly reports to the Board of each
Fund concerning any transactions by
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the Funds under the credit facility and
the Interfund Loan Rate charged.
11. FRIMCo, through the Credit
Facility Team, would administer the
credit facility under its existing
management, advisory, or
administrative contract with each Fund
and would receive no additional
compensation for its services. FRIMCo
may collect fees in connection with
repurchase and lending transactions
generally, including transactions
through the credit facility, for pricing
and record keeping, bookkeeping and
accounting services. These fees would
be no higher than those applicable for
comparable bank loan transactions.
12. No Fund may participate in the
credit facility unless: (a) The Fund has
obtained shareholder approval for its
participation, if such approval is
required by law; (b) the Fund has fully
disclosed all material facts concerning
the credit facility in its prospectus and/
or statement of additional information
(‘‘SAI’’); and (c) the Fund’s participation
in the credit facility is consistent with
its investment objectives, limitations
and organizational documents.
13. In connection with the credit
facility, applicants request an order
under (a) section 6(c) of the Act granting
relief from sections 18(f) and 21(b) of
the Act; (b) section 12(d)(1)(J) of the Act
granting relief from section 12(d)(1) of
the Act; (c) sections 6(c) and 17(b) of the
Act granting relief from sections 17(a)(1)
and 17(a)(3) of the Act; and (d) under
section 17(d) and rule 17d-1 under the
Act to permit certain joint arrangements.
Applicants’ Legal Analysis
1. Section 17(a)(3) generally prohibits
any affiliated person, or affiliated
person of an affiliated person, from
borrowing money or other property from
a registered investment company.
Section 21(b) generally prohibits any
registered management company from
lending money or other property to any
person if that person controls or is
under common control with the
company. Section 2(a)(3)(C) of the Act
defines an ‘‘affiliated person’’ of another
person, in part, to be any person directly
or indirectly controlling, controlled by,
or under common control with, the
other person. Applicants state that the
Funds may be under common control by
virtue of having FRIMCo as their
common investment adviser and having
a common Board and officers.
2. Section 6(c) provides that an
exemptive order may be granted where
an exemption is necessary or
appropriate in the public interest and
consistent with the protection of
investors and the purposes fairly
intended by the policy and provisions of
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the Act. Section 17(b) authorizes the
Commission to exempt a proposed
transaction from section 17(a) provided
that the terms of the transaction,
including the consideration to be paid
or received, are fair and reasonable and
do not involve overreaching on the part
of any person concerned, and the
transaction is consistent with the policy
of the investment company as recited in
its registration statement and with the
general purposes of the Act. Applicants
believe that the proposed arrangements
satisfy these standards for the reasons
discussed below.
3. Applicants submit that sections
17(a)(3) and 21(b) of the Act were
intended to prevent a party with strong
potential adverse interests to, and some
influence over the investment decisions
of, a registered investment company
from causing or inducing the investment
company to engage in lending
transactions that unfairly inure to the
benefit of such party and that are
detrimental to the best interests of the
investment company and its
shareholders. Applicants assert that the
proposed credit facility transactions do
not raise these concerns because: (a)
FRIMCo, through the Credit Facility
Team, would administer the program as
a disinterested fiduciary; (b) all
Interfund Loans would consist only of
uninvested cash reserves that the Funds
otherwise would invest in short-term
repurchase agreements or other shortterm instruments either directly or
through a money market Fund; (c) the
Interfund Loans would not involve a
greater risk than such other investments;
(d) the lending Fund would receive
interest at a rate higher than it could
obtain through such other investments;
and (e) the borrowing Fund would pay
interest at a rate lower than otherwise
available to it under its bank loan
agreements and avoid the up-front
commitment fees associated with
committed lines of credit. Moreover,
applicants believe that the other terms
and conditions in the application would
effectively preclude the possibility of
any Fund obtaining an undue advantage
over any other Fund.
4. Section 17(a)(1) generally prohibits
an affiliated person of a registered
investment company, or an affiliated
person of an affiliated person, from
selling any securities or other property
to the company. Section 12(d)(1)
generally makes it unlawful for a
registered investment company to
purchase or otherwise acquire any
security issued by any other investment
company except in accordance with the
limitations set forth in that section.
Applicants state that the obligation of a
borrowing Fund to repay an Interfund
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Loan may constitute a security under
sections 17(a)(1) and 12(d)(1). Section
12(d)(1)(J) provides that the Commission
may exempt persons or transactions
from any provision of section 12(d)(1) if
and to the extent such exemption is
consistent with the public interest and
the protection of investors. Applicants
contend that the standards under
sections 6(c), 17(b), and 12(d)(1)(J) are
satisfied for all the reasons set forth
above in support of their request for
relief from sections 17(a)(3) and 21(b)
and for the reasons discussed below.
5. Applicants state that section
12(d)(1) was intended to prevent the
pyramiding of investment companies in
order to avoid imposing on investors
additional and duplicative costs and
fees attendant upon multiple layers of
investment companies. Applicants
submit that the proposed credit facility
does not involve these abuses.
Applicants note that there will be no
duplicative costs or fees to the Funds or
shareholders, and that FRIMCo will
receive no additional compensation for
its services in administering the credit
facility. Applicants also note that the
purpose of the proposed credit facility
is to provide economic benefits for all
of the participating Funds and their
shareholders.
6. Section 18(f)(1) prohibits open-end
investment companies from issuing any
senior security except that a company is
permitted to borrow from any bank;
provided, that immediately after the
borrowing, there is asset coverage of at
least 300 per centum for all borrowings
of the company. Under section 18(g) of
the Act, the term ‘‘senior security’’
includes any bond, debenture, note or
similar obligation or instrument
constituting a security and evidencing
indebtedness. Applicants request relief
from section 18(f)(1) to the limited
extent necessary to implement the credit
facility (because the lending Funds are
not banks).
7. Applicants believe that granting
relief under section 6(c) is appropriate
because the Funds would remain
subject to the requirement of section
18(f)(1) that all borrowings of a Fund,
including combined interfund and bank
borrowings, have at least 300% asset
coverage. Based on the conditions and
safeguards described in the application,
applicants also submit that to allow the
Funds to borrow from other Funds
pursuant to the proposed credit facility
is consistent with the purposes and
policies of section 18(f)(1).
8. Section 17(d) and rule 17d–1
generally prohibit any affiliated person
of a registered investment company, or
affiliated persons of an affiliated person,
when acting as principal, from effecting
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any joint transactions in which the
company participates unless the
transaction is approved by the
Commission. Rule 17d–1(b) provides
that in passing upon applications filed
under the rule, the Commission will
consider whether the participation of a
registered investment company in a
joint enterprise on the basis proposed is
consistent with the provisions, policies,
and purposes of the Act and the extent
to which the company’s participation is
on a basis different from or less
advantageous than that of other
participants.
9. Applicants submit that the purpose
of section 17(d) is to avoid overreaching
by an unfair advantage to investment
company insiders. Applicants believe
that the credit facility is consistent with
the provisions, policies, and purposes of
the Act in that it offers both reduced
borrowing costs and enhanced returns
on loaned funds to all participating
Funds and their shareholders.
Applicants note that each Fund would
have an equal opportunity to borrow
and lend on equal terms consistent with
its investment policies and fundamental
investment limitations. Applicants
therefore believe that each Fund’s
participation in the credit facility will
be on terms that are no different from
or less advantageous than that of other
participating Funds.
Applicants’ Conditions
Applicants agree that any order
granting the requested relief will be
subject to the following conditions:
1. The Interfund Loan Rate will be the
average of the Repo Rate and the Bank
Loan Rate.
2. On each business day, the Credit
Facility Team will compare the Bank
Loan Rate with the Repo Rate and will
make cash available for Interfund Loans
only if the Interfund Loan Rate is: (a)
More favorable to the lending Fund than
the Repo Rate and, if applicable, the
yield of any money market Fund in
which the lending Fund could
otherwise invest; and (b) more favorable
to the borrowing Fund than the Bank
Loan Rate.
3. If a Fund has outstanding
borrowings, any Interfund Loans to the
Fund: (a) Will be at an interest rate
equal to or lower than any outstanding
bank loan; (b) will be secured at least on
an equal priority basis with at least an
equivalent percentage of collateral to
loan value as any outstanding bank loan
that requires collateral; (c) will have a
maturity no longer than any outstanding
bank loan (and in any event not over
seven days); and (d) will provide that,
if an event of default by the Fund occurs
under any agreement evidencing an
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outstanding bank loan to the Fund, that
event of default will automatically
(without need for action or notice by the
lending Fund) constitute an immediate
event of default under the Interfund
Lending Agreement entitling the
lending Fund to call the Interfund Loan
(and exercise all rights with respect to
any collateral) and that such call will be
made if the lending bank exercises its
right to call its loan under its agreement
with the borrowing Fund.
4. A Fund may make an unsecured
borrowing through the proposed credit
facility if its outstanding borrowings
from all sources immediately after the
interfund borrowing total 10% or less of
its total assets, provided that if the Fund
has a secured loan outstanding from any
other lender, including but not limited
to another Fund, the Fund’s interfund
borrowing will be secured on at least an
equal priority basis with at least an
equivalent percentage of collateral to
loan value as any outstanding loan that
requires collateral. If a Fund’s total
outstanding borrowings immediately
after an interfund borrowing would be
greater than 10% of its total assets, the
Fund may borrow through the proposed
credit facility only on a secured basis.
A Fund may not borrow through the
proposed credit facility or from any
other source if its total outstanding
borrowings immediately after such
borrowing would be more than 331⁄3%
of its total assets.
5. Before any Fund that has
outstanding interfund borrowings may,
through additional borrowings, cause its
outstanding borrowings from all sources
to exceed 10% of its total assets, the
Fund must first secure each outstanding
Interfund Loan by the pledge of
segregated collateral with a market
value at least equal to 102% of the
outstanding principal value of the loan.
If the total outstanding borrowings of a
Fund with outstanding Interfund Loans
exceed 10% of its total assets for any
other reason (such as a decline in net
asset value or because of shareholder
redemptions), the Fund will within one
business day thereafter: (a) Repay all its
outstanding Interfund Loans; (b) reduce
its outstanding indebtedness to 10% or
less of its total assets; or (c) secure each
outstanding Interfund Loan by the
pledge of segregated collateral with a
market value at least equal to 102% of
the outstanding principal value of the
loan until the Fund’s total outstanding
borrowings cease to exceed 10% of its
total assets, at which time the collateral
called for by this condition 5 shall no
longer be required. Until each Interfund
Loan that is outstanding at any time that
a Fund’s total outstanding borrowings
exceeds 10% is repaid or the Fund’s
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total outstanding borrowings cease to
exceed 10% of its total assets, the Fund
will mark the value of the collateral to
market each day and will pledge such
additional collateral as is necessary to
maintain the market value of the
collateral that secures each outstanding
Interfund Loan at least equal to 102% of
the outstanding principal value of the
Interfund Loan.
6. No Fund may lend to another Fund
through the proposed credit facility if
the loan would cause its aggregate
outstanding loans through the proposed
credit facility to exceed 15% of the
lending Fund’s current net assets at the
time of the loan.
7. A Fund’s Interfund Loans to any
one Fund shall not exceed 5% of the
lending Fund’s net assets.
8. The duration of Interfund Loans
will be limited to the time required to
receive payment for securities sold, but
in no event more than seven days. Loans
effected within seven days of each other
will be treated as separate loan
transactions for purposes of this
condition.
9. The Fund’s borrowings through the
proposed credit facility, as measured on
the day when the most recent loan was
made, will not exceed the greater of
125% of the Fund’s total net cash
redemptions or 102% of sales fails for
the preceding seven calendar days.
10. Each Interfund Loan may be called
on one business day’s notice by a
lending Fund and may be repaid on any
day by a borrowing Fund.
11. A Fund’s participation in the
proposed credit facility must be
consistent with its investment
objectives, and limitations and
organizational documents.
12. The Credit Facility Team will
calculate total Fund borrowing and
lending demand through the proposed
credit facility, and allocate loans on an
equitable basis among the Funds,
without the intervention of any portfolio
manager of the Funds (other than the
money market Fund portfolio manager
acting in his or her capacity as a
member of the Credit Facility Team). All
allocations will require the approval of
at least one member of the Credit
Facility Team who is not the money
market Fund portfolio manager. The
Credit Facility Team will not solicit
cash for the proposed credit facility
from any Fund or prospectively publish
or disseminate loan demand data to
portfolio managers (except to the extent
that the money market Fund portfolio
manager on the Credit Facility Team has
access to loan demand data). The Credit
Facility Team will invest any amounts
remaining after satisfaction of borrowing
demand in accordance with the
E:\FR\FM\01MYN1.SGM
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cchase on PROD1PC60 with NOTICES
25620
Federal Register / Vol. 71, No. 83 / Monday, May 1, 2006 / Notices
standing instructions of the portfolio
managers or return remaining amounts
for investment directly by the portfolio
managers of the Funds.
13. FRIMCo will monitor the
Interfund Loan Rate and the other terms
and conditions of the Interfund Loans
and will make a quarterly report to the
Trustees of each Trust concerning the
participation of the Funds in the
proposed credit facility and the terms
and other conditions of any extensions
of credit under the credit facility.
14. The Board of each Trust,
including a majority of the Independent
Trustees, will:
(a) Review, no less frequently than
quarterly, each Fund’s participation in
the proposed credit facility during the
preceding quarter for compliance with
the conditions of any order permitting
such transactions;
(b) Establish the Bank Loan Rate
formula used to determine the interest
rate on Interfund Loans and review, no
less frequently than annually, the
continuing appropriateness of the Bank
Loan Rate formula; and
(c) Review, no less frequently than
annually, the continuing
appropriateness of each Fund’s
participation in the proposed credit
facility.
15. In the event an Interfund Loan is
not paid according to its terms and such
default is not cured within two business
days from its maturity or from the time
the lending Fund makes a demand for
payment under the provisions of the
Interfund Lending Agreement, FRIMCo
will promptly refer such loan for
arbitration to an independent arbitrator
selected by the Board of each Fund
involved in the loan who will serve as
arbitrator of disputes concerning
Interfund Loans.3 The arbitrator will
resolve any problem promptly, and the
arbitrator’s decision will be binding on
both Funds. The arbitrator will submit,
at least annually, a written report to the
Board setting forth a description of the
nature of any dispute and the actions
taken by the Funds to resolve the
dispute.
16. Each Fund will maintain and
preserve for a period of not less than six
years from the end of the fiscal year in
which any transaction by it under the
proposed credit facility occurred, the
first two years in an easily accessible
place, written records of all such
transactions setting forth a description
of the terms of the transactions,
including the amount, the maturity and
3 If the dispute involves Funds with different
Trustees, the respective Trustees of each Fund will
select an independent arbitrator that is satisfactory
to each Fund.
VerDate Aug<31>2005
17:38 Apr 28, 2006
Jkt 208001
the Interfund Loan Rate, the rate of
interest available at the time on
overnight repurchase agreements and
commercial bank borrowings, the yield
of any money market Fund in which the
lending Fund could otherwise invest,
and such other information presented to
the Fund’s Board in connection with the
review required by conditions 13 and
14.
17. FRIMCo will prepare and submit
to the Board for review an initial report
describing the operations of the
proposed credit facility and the
procedures to be implemented to ensure
that all Funds are treated fairly. After
the commencement of the proposed
credit facility, FRIMCo will report on
the operations of the proposed credit
facility at the Board’s quarterly
meetings.
In addition, for two years following
the commencement of the proposed
credit facility, the independent auditors
for each Trust shall prepare an annual
report that evaluates FRIMCo’s assertion
that it has established procedures
reasonably designed to achieve
compliance with the terms and
conditions of the order. The report shall
be prepared in accordance with the
Statements on Standards for Attestation
Engagements No. 10 and it shall be filed
pursuant to Item 77Q3 of Form N–SAR,
as such Statements or Form may be
revised, amended, or superseded from
time to time. In particular, the report
shall address procedures designed to
achieve the following objectives:
(a) That the Interfund Loan Rate will
be higher than the Repo Rate, and, if
applicable, the yield of the money
market Funds, but lower than the Bank
Loan Rate;
(b) Compliance with the collateral
requirements as set forth in the
application;
(c) Compliance with the percentage
limitations on interfund borrowing and
lending;
(d) Allocation of interfund borrowing
and lending demand in an equitable
manner and in accordance with
procedures established by the Board;
and
(e) That the interest rate on any
Interfund Loan does not exceed the
interest rate on any third-party
borrowings of a borrowing Fund at the
time of the Interfund Loan. After the
final report is filed, each Trust’s
independent auditors, in connection
with their audit examinations of the
Funds, will continue to review the
operation of the proposed credit facility
for compliance with the conditions of
the application and their review will
form the basis, in part, of the auditor’s
PO 00000
Frm 00061
Fmt 4703
Sfmt 4703
report on internal accounting controls in
Form N–SAR.
18. No Fund will participate in the
proposed credit facility upon receipt of
requisite regulatory approval unless it
has fully disclosed in its prospectus
and/or SAI all material facts about its
intended participation.
19. The Board of each Trust will
satisfy the fund governance standards as
defined in rule 0–1(a)(7) under the Act.
For the Commission, by the Division of
Investment Management, under delegated
authority.
Jill M. Peterson,
Assistant Secretary.
[FR Doc. E6–6481 Filed 4–28–06; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
Sunshine Act Meeting
Notice is hereby given, pursuant to
the provisions of the Government in the
Sunshine Act, Public Law 94–409, that
the Securities and Exchange
Commission will hold the following
meeting during the week of May 1,
2006:
A closed meeting will be held on
Thursday, May 4, 2006 at 2 p.m.
Commissioners, Counsel to the
Commissioners, the Secretary to the
Commission, and recording secretaries
will attend the closed meeting. Certain
staff members who have an interest in
the matters may also be present.
The General Counsel of the
Commission, or his designee, has
certified that, in his opinion, one or
more of the exemptions set forth in 5
U.S.C. 552b(c)(3), (5), (7), (9)(B), and
(10) and 17 CFR 200.402(a)(3), (5), (7),
(9)(ii) and (10) permit consideration of
the scheduled matters at the closed
meeting.
Commissioner Atkins, as duty officer,
voted to consider the items listed for the
closed meeting in closed session.
The subject matter of the closed
meeting scheduled for Thursday, May 4,
2006 will be:
Formal orders of investigation;
Institution and settlement of
injunctive actions;
Institution and settlement of
administrative proceedings of an
enforcement nature; and
Resolution of litigation claims.
At times, changes in Commission
priorities require alterations in the
scheduling of meeting items.
For further information and to
ascertain what, if any, matters have been
added, deleted or postponed, please
contact: The Office of the Secretary at
(202) 551–5400.
E:\FR\FM\01MYN1.SGM
01MYN1
]]>Agencies
[Federal Register Volume 71, Number 83 (Monday, May 1, 2006)]
[Notices]
[Pages 25616-25620]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E6-6481]
=======================================================================
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 27292; 812-13214]
Frank Russell Investment Company, et al.; Notice of Application
April 25, 2006.
AGENCY: Securities and Exchange Commission (``Commission'').
ACTION: Notice of an application for an order under (a) section 6(c) of
the Investment Company Act of 1940 (``Act'') granting an exemption from
sections 18(f) and 21(b) of the Act; (b) section 12(d)(1)(J) of the Act
granting an exemption from section 12(d)(1) of the Act; (c) sections
6(c) and 17(b) of the Act granting an exemption from sections 17(a)(1)
and 17(a)(3) of the Act; and (d) section 17(d) of the Act and rule 17d-
1 under the Act to permit certain joint transactions.
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Summary of the Application: Applicants request an order that would
permit certain registered open-end management investment companies to
participate in a joint lending and borrowing facility.
Applicants: Frank Russell Investment Company and Russell Investment
Funds (each, a ``Trust'' and collectively, the ``Trusts''), and Frank
Russell Investment Management Company (``FRIMCo'').
Filing Dates: The application was filed on July 19, 2005 and amended on
April 13, 2006. Applicants have agreed to file an amendment during the
notice period, the substance of which is reflected in the notice.
Hearing or Notification of Hearing: An order granting the application
will be issued unless the Commission orders a hearing. Interested
persons may request a hearing by writing to the Commission's Secretary
and serving applicants with a copy of the request, personally or by
mail. Hearing requests should be received by the Commission by 5:30
p.m. on May 22, 2006, and should be accompanied by proof of service on
applicants, in the form of an affidavit or, for lawyers, a certificate
of service. Hearing requests should state the nature of the writer's
interest, the reason for the request, and the issues contested. Persons
who wish to be notified of a hearing may request notification by
writing to the Commission's Secretary.
ADDRESSES: Secretary, U.S. Securities and Exchange Commission, 100 F
Street, NE., Washington, DC, 20549-1090. Applicants, c/o Gregory J.
Lyons, Esq., Frank Russell Company, 909 A Street, Tacoma, Washington
98402.
FOR FURTHER INFORMATION CONTACT: Marilyn Mann, Senior Counsel, at (202)
551-6813 or Mary Kay Frech, Branch Chief, at (202) 551-6821 (Division
of Investment Management, Office of Investment Company Regulation).
SUPPLEMENTARY INFORMATION: The following is a summary of the
application. The complete application may be obtained for a fee at the
Commission's Public Reference Desk, 100 F Street, NE., Washington, DC,
20549-0102 (tel. (202) 551-5850).
Applicants' Representations
1. Each Trust is organized as a Massachusetts business trust and is
registered under the Act as an open-end management investment company.
Frank Russell Investment Company consists of 34 separate series
(``Funds'') and Russell Investment Funds consists of 5 separate Funds.
FRIMCo, a Washington corporation, is registered as an investment
adviser under the Investment Advisers Act of 1940, and serves as the
investment adviser to each Fund.\1\ An existing Commission order
permits the Funds to invest uninvested cash balances in money market
Funds that comply with rule 2a-7 under the Act.\2\
---------------------------------------------------------------------------
\1\ All entities that currently intend to rely on the requested
relief have been named as applicants.
\2\ Frank Russell Investment Company, Investment Company Act
Release Nos. 25416 (February 12, 2002) (notice) and 25458 (March 12,
2002) (order).
---------------------------------------------------------------------------
2. Some Funds may lend money to banks or other entities by entering
into
[[Page 25617]]
repurchase agreements or purchasing other short-term investments. Other
Funds may borrow money from the same or similar banks for temporary
purposes to satisfy redemption requests or to cover unanticipated cash
shortfalls such as a trade ``fail'' in which cash payment for a
security sold by a Fund has been delayed. Currently, the Funds have
entered into a credit agreement with a bank. If a Fund were to borrow
money under the credit agreement, it would pay interest on the loan at
a rate that is significantly higher than the rate that is earned by
other (non-borrowing) Funds on investments in repurchase agreements and
other short-term instruments of the same maturity as the loan under the
credit agreement. Applicants state that this differential represents
the profit the bank would earn on loans under the credit agreement and
is not attributable to any material difference in the credit quality or
risk of such transactions.
3. Applicants request an order that would permit the Funds to enter
into interfund lending agreements (``Interfund Lending Agreements'')
under which the Funds would lend and borrow money for temporary
purposes directly to and from each other through a credit facility
(``Interfund Loan''). Applicants believe that the proposed credit
facility would reduce the Funds' borrowing costs and enhance their
ability to earn higher interest rates on short-term investments.
Although the proposed credit facility would reduce the Funds' need to
borrow from banks, the Funds would be free to establish committed lines
of credit or other borrowing arrangements with banks.
4. Applicants anticipate that the credit facility would provide a
borrowing Fund with significant savings when the cash position of the
Fund is insufficient to meet temporary cash requirements. This
situation could arise when redemptions exceed anticipated volumes and
certain Funds have insufficient cash on hand to satisfy such
redemptions. When a Fund liquidates portfolio securities to meet
redemption requests which normally are effected immediately, it often
does not receive payment in settlement for up to three days (or longer
for certain foreign transactions). The credit facility would provide a
source of immediate, short-term liquidity pending settlement of the
sale of portfolio securities.
5. Applicants also propose using the credit facility when a sale of
securities ``fails'' due to circumstances such as a delay in the
delivery of cash to a Fund's custodian or improper delivery
instructions by the broker effecting the transaction. Sales fails may
present a cash shortfall if a Fund has undertaken to purchase
securities using the proceeds from the securities sold. Alternatively,
the Fund could fail on its intended purchase due to lack of funds from
the previous sale, resulting in additional cost to the Fund, or sell a
security on a same day settlement basis, earning a lower return on the
investment. Use of the credit facility under these circumstances would
enable the Fund to have access to immediate short-term liquidity.
6. While bank borrowings generally could supply needed cash to
cover unanticipated redemptions and sales fails, under the proposed
credit facility a borrowing Fund would pay lower interest rates than
those offered by banks on short-term loans. In addition, Funds making
short-term cash loans directly to other Funds would earn interest at a
rate higher than they otherwise could obtain from investing their cash
in repurchase agreements or purchasing shares of a money market Fund.
Thus, applicants believe that the proposed credit facility would
benefit both borrowing and lending Funds.
7. The interest rate charged to a Fund on any Interfund Loan
(``Interfund Loan Rate'') would be the average of the ``Repo Rate'' and
the ``Bank Loan Rate,'' both as defined below. The Repo Rate on any day
would be the highest rate available to the Funds from investing in
overnight repurchase agreements. The Bank Loan Rate on any day would be
calculated by FRIMCo each day an Interfund Loan is made according to a
formula established by a Fund's board of trustees (``Board'') intended
to approximate the lowest interest rate at which bank short-term loans
would be available to the Funds. The formula would be based upon a
publicly available rate (e.g., Federal funds plus 25 basis points) and
would vary with this rate so as to reflect changing bank loan rates.
The Board of each Fund would periodically review the continuing
appropriateness of using the publicly available rate to determine the
Bank Loan Rate, as well as the relationship between the Bank Loan Rate
and current bank loan rates that would be available to the Funds. The
initial formula and any subsequent modifications to the formula would
be subject to the approval of each Fund's Board.
8. The credit facility would be administered by FRIMCo's fund
accounting department, an investment professional within FRIMCo who
serves as a portfolio manager of money market Funds and a compliance
professional within FRIMCo (collectively, the ``Credit Facility
Team''). Under the proposed credit facility, the portfolio managers for
each participating Fund could provide standing instructions to
participate daily as a borrower or lender. The Credit Facility Team on
each business day would collect data on the uninvested cash and
borrowing requirements of all participating Funds from the Funds'
custodian. Once it determined the aggregate amount of cash available
for loans and borrowing demand, the Credit Facility Team would allocate
loans among borrowing Funds without any further communication from
portfolio managers other than the money market Fund portfolio manager
on the Credit Facility Team. Applicants expect far more available
uninvested cash each day than borrowing demand. All allocations will
require the approval of at least one member of the Credit Facility Team
who is not a money market Fund portfolio manager. After the Credit
Facility Team has allocated cash for Interfund Loans, the Credit
Facility Team would invest any remaining cash in accordance with the
standing instructions of portfolio managers or return remaining amounts
to the Funds. The money market Funds typically would not participate as
borrowers because they rarely need to borrow cash to meet redemptions.
9. The Credit Facility Team would allocate borrowing demand and
cash available for lending among the Funds on what the Credit Facility
Team believes to be an equitable basis, subject to certain
administrative procedures applicable to all Funds, such as the time of
filing requests to participate, minimum loan lot sizes, and the need to
minimize the number of transactions and associated administrative
costs. To reduce transaction costs, each Interfund Loan normally would
be allocated in a manner intended to minimize the number of
participants necessary to complete the loan transaction. The method of
allocation and related administrative procedures would be approved by
each Fund's Board, including a majority of trustees who are not
``interested persons'' of the Fund, as defined in section 2(a)(19) of
the Act (``Independent Trustees''), to ensure that both borrowing and
lending Funds participate on an equitable basis.
10. FRIMCo would (a) monitor the Interfund Loan Rate and the other
terms and conditions of the loans; (b) limit the borrowings and loans
entered into by each Fund to ensure that they comply with the Fund's
investment policies and limitations; (c) ensure equitable treatment of
each Fund; and (d) make quarterly reports to the Board of each Fund
concerning any transactions by
[[Page 25618]]
the Funds under the credit facility and the Interfund Loan Rate
charged.
11. FRIMCo, through the Credit Facility Team, would administer the
credit facility under its existing management, advisory, or
administrative contract with each Fund and would receive no additional
compensation for its services. FRIMCo may collect fees in connection
with repurchase and lending transactions generally, including
transactions through the credit facility, for pricing and record
keeping, bookkeeping and accounting services. These fees would be no
higher than those applicable for comparable bank loan transactions.
12. No Fund may participate in the credit facility unless: (a) The
Fund has obtained shareholder approval for its participation, if such
approval is required by law; (b) the Fund has fully disclosed all
material facts concerning the credit facility in its prospectus and/or
statement of additional information (``SAI''); and (c) the Fund's
participation in the credit facility is consistent with its investment
objectives, limitations and organizational documents.
13. In connection with the credit facility, applicants request an
order under (a) section 6(c) of the Act granting relief from sections
18(f) and 21(b) of the Act; (b) section 12(d)(1)(J) of the Act granting
relief from section 12(d)(1) of the Act; (c) sections 6(c) and 17(b) of
the Act granting relief from sections 17(a)(1) and 17(a)(3) of the Act;
and (d) under section 17(d) and rule 17d-1 under the Act to permit
certain joint arrangements.
Applicants' Legal Analysis
1. Section 17(a)(3) generally prohibits any affiliated person, or
affiliated person of an affiliated person, from borrowing money or
other property from a registered investment company. Section 21(b)
generally prohibits any registered management company from lending
money or other property to any person if that person controls or is
under common control with the company. Section 2(a)(3)(C) of the Act
defines an ``affiliated person'' of another person, in part, to be any
person directly or indirectly controlling, controlled by, or under
common control with, the other person. Applicants state that the Funds
may be under common control by virtue of having FRIMCo as their common
investment adviser and having a common Board and officers.
2. Section 6(c) provides that an exemptive order may be granted
where an exemption is necessary or appropriate in the public interest
and consistent with the protection of investors and the purposes fairly
intended by the policy and provisions of the Act. Section 17(b)
authorizes the Commission to exempt a proposed transaction from section
17(a) provided that the terms of the transaction, including the
consideration to be paid or received, are fair and reasonable and do
not involve overreaching on the part of any person concerned, and the
transaction is consistent with the policy of the investment company as
recited in its registration statement and with the general purposes of
the Act. Applicants believe that the proposed arrangements satisfy
these standards for the reasons discussed below.
3. Applicants submit that sections 17(a)(3) and 21(b) of the Act
were intended to prevent a party with strong potential adverse
interests to, and some influence over the investment decisions of, a
registered investment company from causing or inducing the investment
company to engage in lending transactions that unfairly inure to the
benefit of such party and that are detrimental to the best interests of
the investment company and its shareholders. Applicants assert that the
proposed credit facility transactions do not raise these concerns
because: (a) FRIMCo, through the Credit Facility Team, would administer
the program as a disinterested fiduciary; (b) all Interfund Loans would
consist only of uninvested cash reserves that the Funds otherwise would
invest in short-term repurchase agreements or other short-term
instruments either directly or through a money market Fund; (c) the
Interfund Loans would not involve a greater risk than such other
investments; (d) the lending Fund would receive interest at a rate
higher than it could obtain through such other investments; and (e) the
borrowing Fund would pay interest at a rate lower than otherwise
available to it under its bank loan agreements and avoid the up-front
commitment fees associated with committed lines of credit. Moreover,
applicants believe that the other terms and conditions in the
application would effectively preclude the possibility of any Fund
obtaining an undue advantage over any other Fund.
4. Section 17(a)(1) generally prohibits an affiliated person of a
registered investment company, or an affiliated person of an affiliated
person, from selling any securities or other property to the company.
Section 12(d)(1) generally makes it unlawful for a registered
investment company to purchase or otherwise acquire any security issued
by any other investment company except in accordance with the
limitations set forth in that section. Applicants state that the
obligation of a borrowing Fund to repay an Interfund Loan may
constitute a security under sections 17(a)(1) and 12(d)(1). Section
12(d)(1)(J) provides that the Commission may exempt persons or
transactions from any provision of section 12(d)(1) if and to the
extent such exemption is consistent with the public interest and the
protection of investors. Applicants contend that the standards under
sections 6(c), 17(b), and 12(d)(1)(J) are satisfied for all the reasons
set forth above in support of their request for relief from sections
17(a)(3) and 21(b) and for the reasons discussed below.
5. Applicants state that section 12(d)(1) was intended to prevent
the pyramiding of investment companies in order to avoid imposing on
investors additional and duplicative costs and fees attendant upon
multiple layers of investment companies. Applicants submit that the
proposed credit facility does not involve these abuses. Applicants note
that there will be no duplicative costs or fees to the Funds or
shareholders, and that FRIMCo will receive no additional compensation
for its services in administering the credit facility. Applicants also
note that the purpose of the proposed credit facility is to provide
economic benefits for all of the participating Funds and their
shareholders.
6. Section 18(f)(1) prohibits open-end investment companies from
issuing any senior security except that a company is permitted to
borrow from any bank; provided, that immediately after the borrowing,
there is asset coverage of at least 300 per centum for all borrowings
of the company. Under section 18(g) of the Act, the term ``senior
security'' includes any bond, debenture, note or similar obligation or
instrument constituting a security and evidencing indebtedness.
Applicants request relief from section 18(f)(1) to the limited extent
necessary to implement the credit facility (because the lending Funds
are not banks).
7. Applicants believe that granting relief under section 6(c) is
appropriate because the Funds would remain subject to the requirement
of section 18(f)(1) that all borrowings of a Fund, including combined
interfund and bank borrowings, have at least 300% asset coverage. Based
on the conditions and safeguards described in the application,
applicants also submit that to allow the Funds to borrow from other
Funds pursuant to the proposed credit facility is consistent with the
purposes and policies of section 18(f)(1).
8. Section 17(d) and rule 17d-1 generally prohibit any affiliated
person of a registered investment company, or affiliated persons of an
affiliated person, when acting as principal, from effecting
[[Page 25619]]
any joint transactions in which the company participates unless the
transaction is approved by the Commission. Rule 17d-1(b) provides that
in passing upon applications filed under the rule, the Commission will
consider whether the participation of a registered investment company
in a joint enterprise on the basis proposed is consistent with the
provisions, policies, and purposes of the Act and the extent to which
the company's participation is on a basis different from or less
advantageous than that of other participants.
9. Applicants submit that the purpose of section 17(d) is to avoid
overreaching by an unfair advantage to investment company insiders.
Applicants believe that the credit facility is consistent with the
provisions, policies, and purposes of the Act in that it offers both
reduced borrowing costs and enhanced returns on loaned funds to all
participating Funds and their shareholders. Applicants note that each
Fund would have an equal opportunity to borrow and lend on equal terms
consistent with its investment policies and fundamental investment
limitations. Applicants therefore believe that each Fund's
participation in the credit facility will be on terms that are no
different from or less advantageous than that of other participating
Funds.
Applicants' Conditions
Applicants agree that any order granting the requested relief will
be subject to the following conditions:
1. The Interfund Loan Rate will be the average of the Repo Rate and
the Bank Loan Rate.
2. On each business day, the Credit Facility Team will compare the
Bank Loan Rate with the Repo Rate and will make cash available for
Interfund Loans only if the Interfund Loan Rate is: (a) More favorable
to the lending Fund than the Repo Rate and, if applicable, the yield of
any money market Fund in which the lending Fund could otherwise invest;
and (b) more favorable to the borrowing Fund than the Bank Loan Rate.
3. If a Fund has outstanding borrowings, any Interfund Loans to the
Fund: (a) Will be at an interest rate equal to or lower than any
outstanding bank loan; (b) will be secured at least on an equal
priority basis with at least an equivalent percentage of collateral to
loan value as any outstanding bank loan that requires collateral; (c)
will have a maturity no longer than any outstanding bank loan (and in
any event not over seven days); and (d) will provide that, if an event
of default by the Fund occurs under any agreement evidencing an
outstanding bank loan to the Fund, that event of default will
automatically (without need for action or notice by the lending Fund)
constitute an immediate event of default under the Interfund Lending
Agreement entitling the lending Fund to call the Interfund Loan (and
exercise all rights with respect to any collateral) and that such call
will be made if the lending bank exercises its right to call its loan
under its agreement with the borrowing Fund.
4. A Fund may make an unsecured borrowing through the proposed
credit facility if its outstanding borrowings from all sources
immediately after the interfund borrowing total 10% or less of its
total assets, provided that if the Fund has a secured loan outstanding
from any other lender, including but not limited to another Fund, the
Fund's interfund borrowing will be secured on at least an equal
priority basis with at least an equivalent percentage of collateral to
loan value as any outstanding loan that requires collateral. If a
Fund's total outstanding borrowings immediately after an interfund
borrowing would be greater than 10% of its total assets, the Fund may
borrow through the proposed credit facility only on a secured basis. A
Fund may not borrow through the proposed credit facility or from any
other source if its total outstanding borrowings immediately after such
borrowing would be more than 33\1/3\% of its total assets.
5. Before any Fund that has outstanding interfund borrowings may,
through additional borrowings, cause its outstanding borrowings from
all sources to exceed 10% of its total assets, the Fund must first
secure each outstanding Interfund Loan by the pledge of segregated
collateral with a market value at least equal to 102% of the
outstanding principal value of the loan. If the total outstanding
borrowings of a Fund with outstanding Interfund Loans exceed 10% of its
total assets for any other reason (such as a decline in net asset value
or because of shareholder redemptions), the Fund will within one
business day thereafter: (a) Repay all its outstanding Interfund Loans;
(b) reduce its outstanding indebtedness to 10% or less of its total
assets; or (c) secure each outstanding Interfund Loan by the pledge of
segregated collateral with a market value at least equal to 102% of the
outstanding principal value of the loan until the Fund's total
outstanding borrowings cease to exceed 10% of its total assets, at
which time the collateral called for by this condition 5 shall no
longer be required. Until each Interfund Loan that is outstanding at
any time that a Fund's total outstanding borrowings exceeds 10% is
repaid or the Fund's total outstanding borrowings cease to exceed 10%
of its total assets, the Fund will mark the value of the collateral to
market each day and will pledge such additional collateral as is
necessary to maintain the market value of the collateral that secures
each outstanding Interfund Loan at least equal to 102% of the
outstanding principal value of the Interfund Loan.
6. No Fund may lend to another Fund through the proposed credit
facility if the loan would cause its aggregate outstanding loans
through the proposed credit facility to exceed 15% of the lending
Fund's current net assets at the time of the loan.
7. A Fund's Interfund Loans to any one Fund shall not exceed 5% of
the lending Fund's net assets.
8. The duration of Interfund Loans will be limited to the time
required to receive payment for securities sold, but in no event more
than seven days. Loans effected within seven days of each other will be
treated as separate loan transactions for purposes of this condition.
9. The Fund's borrowings through the proposed credit facility, as
measured on the day when the most recent loan was made, will not exceed
the greater of 125% of the Fund's total net cash redemptions or 102% of
sales fails for the preceding seven calendar days.
10. Each Interfund Loan may be called on one business day's notice
by a lending Fund and may be repaid on any day by a borrowing Fund.
11. A Fund's participation in the proposed credit facility must be
consistent with its investment objectives, and limitations and
organizational documents.
12. The Credit Facility Team will calculate total Fund borrowing
and lending demand through the proposed credit facility, and allocate
loans on an equitable basis among the Funds, without the intervention
of any portfolio manager of the Funds (other than the money market Fund
portfolio manager acting in his or her capacity as a member of the
Credit Facility Team). All allocations will require the approval of at
least one member of the Credit Facility Team who is not the money
market Fund portfolio manager. The Credit Facility Team will not
solicit cash for the proposed credit facility from any Fund or
prospectively publish or disseminate loan demand data to portfolio
managers (except to the extent that the money market Fund portfolio
manager on the Credit Facility Team has access to loan demand data).
The Credit Facility Team will invest any amounts remaining after
satisfaction of borrowing demand in accordance with the
[[Page 25620]]
standing instructions of the portfolio managers or return remaining
amounts for investment directly by the portfolio managers of the Funds.
13. FRIMCo will monitor the Interfund Loan Rate and the other terms
and conditions of the Interfund Loans and will make a quarterly report
to the Trustees of each Trust concerning the participation of the Funds
in the proposed credit facility and the terms and other conditions of
any extensions of credit under the credit facility.
14. The Board of each Trust, including a majority of the
Independent Trustees, will:
(a) Review, no less frequently than quarterly, each Fund's
participation in the proposed credit facility during the preceding
quarter for compliance with the conditions of any order permitting such
transactions;
(b) Establish the Bank Loan Rate formula used to determine the
interest rate on Interfund Loans and review, no less frequently than
annually, the continuing appropriateness of the Bank Loan Rate formula;
and
(c) Review, no less frequently than annually, the continuing
appropriateness of each Fund's participation in the proposed credit
facility.
15. In the event an Interfund Loan is not paid according to its
terms and such default is not cured within two business days from its
maturity or from the time the lending Fund makes a demand for payment
under the provisions of the Interfund Lending Agreement, FRIMCo will
promptly refer such loan for arbitration to an independent arbitrator
selected by the Board of each Fund involved in the loan who will serve
as arbitrator of disputes concerning Interfund Loans.\3\ The arbitrator
will resolve any problem promptly, and the arbitrator's decision will
be binding on both Funds. The arbitrator will submit, at least
annually, a written report to the Board setting forth a description of
the nature of any dispute and the actions taken by the Funds to resolve
the dispute.
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\3\ If the dispute involves Funds with different Trustees, the
respective Trustees of each Fund will select an independent
arbitrator that is satisfactory to each Fund.
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16. Each Fund will maintain and preserve for a period of not less
than six years from the end of the fiscal year in which any transaction
by it under the proposed credit facility occurred, the first two years
in an easily accessible place, written records of all such transactions
setting forth a description of the terms of the transactions, including
the amount, the maturity and the Interfund Loan Rate, the rate of
interest available at the time on overnight repurchase agreements and
commercial bank borrowings, the yield of any money market Fund in which
the lending Fund could otherwise invest, and such other information
presented to the Fund's Board in connection with the review required by
conditions 13 and 14.
17. FRIMCo will prepare and submit to the Board for review an
initial report describing the operations of the proposed credit
facility and the procedures to be implemented to ensure that all Funds
are treated fairly. After the commencement of the proposed credit
facility, FRIMCo will report on the operations of the proposed credit
facility at the Board's quarterly meetings.
In addition, for two years following the commencement of the
proposed credit facility, the independent auditors for each Trust shall
prepare an annual report that evaluates FRIMCo's assertion that it has
established procedures reasonably designed to achieve compliance with
the terms and conditions of the order. The report shall be prepared in
accordance with the Statements on Standards for Attestation Engagements
No. 10 and it shall be filed pursuant to Item 77Q3 of Form N-SAR, as
such Statements or Form may be revised, amended, or superseded from
time to time. In particular, the report shall address procedures
designed to achieve the following objectives:
(a) That the Interfund Loan Rate will be higher than the Repo Rate,
and, if applicable, the yield of the money market Funds, but lower than
the Bank Loan Rate;
(b) Compliance with the collateral requirements as set forth in the
application;
(c) Compliance with the percentage limitations on interfund
borrowing and lending;
(d) Allocation of interfund borrowing and lending demand in an
equitable manner and in accordance with procedures established by the
Board; and
(e) That the interest rate on any Interfund Loan does not exceed
the interest rate on any third-party borrowings of a borrowing Fund at
the time of the Interfund Loan. After the final report is filed, each
Trust's independent auditors, in connection with their audit
examinations of the Funds, will continue to review the operation of the
proposed credit facility for compliance with the conditions of the
application and their review will form the basis, in part, of the
auditor's report on internal accounting controls in Form N-SAR.
18. No Fund will participate in the proposed credit facility upon
receipt of requisite regulatory approval unless it has fully disclosed
in its prospectus and/or SAI all material facts about its intended
participation.
19. The Board of each Trust will satisfy the fund governance
standards as defined in rule 0-1(a)(7) under the Act.
For the Commission, by the Division of Investment Management,
under delegated authority.
Jill M. Peterson,
Assistant Secretary.
[FR Doc. E6-6481 Filed 4-28-06; 8:45 am]
BILLING CODE 8010-01-P
